April 2014
Disclaimer: As used in this volume the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
The April 2014 Global Financial Stability Report (GFSR) assesses the challenging transitions that the global financial system is currently undergoing on the path to greater stability. Chapter 1 finds that these transitions are far from complete, and stability conditions are far from normal. For advanced and emerging market economies alike, a successful shift from liquidity-driven to growth-driven markets requires a number of elements. The report discusses these elements, including: a normalization of U.S. monetary policy that avoids financial stability risks; financial rebalancing in emerging market economies amid tighter external financial conditions and higher corporate debt levels; further progress in the euro area’s transition from fragmentation to robust integration; and the successful implementation of Abenomics in Japan to deliver sustained growth and stable inflation. Chapter 2 examines the role of the composition of the investor base and local financial systems for the stability of emerging market portfolio flows and asset prices. Chapter 3 looks at the issue of too-important-to-fail and provides new estimates of the implicit funding subsidy received by systemically important banks.
Chapter 1 finds that these transitions are far from complete, and stability conditions are far from normal. For advanced and emerging market economies alike, a successful shift from liquidity-driven to growth-driven markets requires a number of elements.
| Boxes | |||
| 1.1 | Deleveraging Trends in Selected Advanced Economies | ||
| 1.2 | Is the Japanese Financial System Rebalancing, and What Are the Financial Stability Implications? | ||
| 1.3 | Recent Periods of Turbulence in Emerging Market Economies | ||
| 1.4 | Macroprudential Policy in the United States | ||
| 1.5 | Financial Regulatory Reform: Can We Make It to the Finish Line? | ||
| 1.6 | Rollout of Banking Union Is Progressing, but Challenges Remain | ||
| 1.7 | European Union Bank Deleveraging | ||
| Tables | |||
| 1.1 | Issuance Trends for U.S. High-Yield Bonds and Loans | ||
| Data | 1.1.1 | Indebtedness and Leverage in Selected Advanced Economies | |
| Data | 1.1.2 | Reduction in Gross Debt Levels in Selected Advanced Economies from the 2009–13 Peak | |
| Data | 1.2 | Change in 10-Year Government Bond Yields | |
| Data | 1.3 | Correlation and Beta between the U.S. Term Premium in the United States and other Major Advanced Economies | |
| Data | 1.4 | Debt, Leverage, and Credit in Selected Emerging Market Economies | |
| Data | 1.5 | Change in Gross Debt Levels in Selected Emerging Market Economies | |
| Data | 1.6 | Summary of Indicators | |
| 1.7 | Yield Curve Data Sources | ||
| Data | 1.8 | Correlation of Term Premium Estimates | |
| Data | 1.9 | Sensitivity to the U.S. Term Premium | |
| Data | 1.10 | Granger Causality | |
| 1.11 | Coverage of Firms by S&P Capital IQ | ||
| 1.12 | Credit Variables Used in the Vector Autoregression Exercise | ||
| Figures | |||
| Data | 1.1 | Global Financial Stability Map | |
| Data | 1.1.1 | Trends in Indebtedness in Selected Advanced Economies since the Crisis | |
| Data | 1.2 | Global Financial Stability Map: Assessment of Risks and Conditions | |
| Data | 1.2.1 | Japanese Financial System | |
| Data | 1.3 | Federal Reserve Lending Survey and Institute for Supply Managmenent New Orders: Green Shoots? | |
| Data | 1.3.1 | Asset Class Performance | |
| Data | 1.4 | U.S. Nonfinancial Coirporations: Credit Cycle Indicators | |
| Data | 1.5 | U.S. Nonfinancial Corporations: Key Financial Indicators | |
| Data | 1.6 | S&P 500 Price-to-Earnings Ratio | |
| Data | 1.7 | Decomposition of Equity Market Performance | |
| Data | 1.8 | U.S. High-Yield Bond and Leveraged Loan Issuance with Lower Standards | |
| Data | 1.9 | Leveraged Loans: Debt-to-EBITDA Ratio for Highly Leveraged Loans | |
| Data | 1.10 | U.S. Nonfinancial Corporations: Market-Based Financing | |
| Data | 1.11 | Federal Reserve Guidance Gaining Credibility? | |
| Data | 1.12 | Ten-year U.S. Treasury Rate Projectsions Based on Exit Scenario | |
| Data | 1.13 | Global Interest Rate Scenarios | |
| Data | 1.14 | Bond Flows to Emerging Market Economies and Domestic Credit in the Face of Tighter External Conditions | |
| Data | 1.15 | Private Sector Gross Debt and Credit in Selected Emerging Market Economies | |
| Data | 1.16 | Current Account Balance and Real Rates Now and Pre-Financial Crisis | |
| Data | 1.17 | Policy Space | |
| Data | 1.18 | Ratio of International Reserves to 2014 External Financing Requirements | |
| Data | 1.19 | Coverage of Current Account by Foreign Direct Investment | |
| Data | 1.20 | Corporate Debt in Emerging Markets | |
| Data | 1.21 | Emerging Market Bank Resilience | |
| Data | 1.22 | China: Wealth Management Products and Trusts | |
| Data | 1.23 | China: Selected Financial Sector Developments | |
| Data | 1.24 | Total and Retail Portfolio Flows to Selected Emerging Market and Other Economies | |
| Data | 1.25 | Share of Nonresidential Holdings of Local Currency Government Debt and Market Liquidity | |
| 1.26 | Summary of Selected Emerging Market Policy Actions since May 2013 | ||
| Data | 1.27 | Bank Credit and Market Indicators | |
| Data | 1.28 | Euro Area Bank Asset Quality | |
| Data | 1.29 | Euro Area Bank Profitability, Buffers, and Interest Rates | |
| Data | 1.30 | Assets of Banks in the Euro Area | |
| 1.31 | Simulated Cumulative Response of Bank Corporate Credit | ||
| Data | 1.32 | Euro Area Write-Down Potential | |
| Data | 1.33 | Strength of Insolvency Procedures and Nonperforming Loans in Advanced Economies, 2013 | |
| Data | 1.34 | Sources of Nonfinancial Corporate Credit, 2013:Q3 | |
| Data | 1.35 | Term Premium Estimates under Alternative Affine Models | |
| Data | 1.36 | CEMBI Model Quarterly Spreads and Model Fits | |
| 1.37 | Vector Autoregression Model Residuals | ||
| 1.38 | Comparing the Effects on Credit of One-Time Shocks: Cumulative Impulse Response Functions | ||
Chapter 2 examines the role of the composition of the investor base and local financial systems for the stability of emerging market portfolio flows and asset prices. The chapter finds that the investor base has been tilting toward making capital flows more sensitive to global financial conditions. However, emerging market economies can improve their resilience by deepening their financial systems.
| Boxes | |||||
| 2.1 | A Primer on Mutual Funds Evolving Emerging Market Assets and Their Investor Bases |
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| Data | 2.2 | Financial Deepening in Emerging Markets Identifying the Financial Stability Effects of Changes in the Investor Base and in Local Financial Systems |
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| Data | 2.3 | Investment Strategies of Institutional Investors | |||
| 2.4 | Are Investors Differentiating among Emerging Markets during Stress Episodes? |
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| 2.5 | Measuring Herding Policy Implications and Conclusions |
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| Tables | |||||
| 2.1 | Size of Global and Local Institutional Investors and Mutual Funds | ||||
| 2.2 | Role of Financial Deepening in Dampening the Impact of Global Financial Shocks on Asset Prices | ||||
| 2.3 | Summary of Methods and Results | ||||
| 2.4 | Sample Economies | ||||
| 2.5 | Definition of Variables Used in Estimations | ||||
| 2.6 | Local Macroeconomic Factors and Global Financial Shocks—The Effect on Asset Prices and Portfolio Flows | ||||
| Figures | |||||
| 2.1 | Investor Base for Bonds in Emerging Markets | ||||
| Data | 2.2 | Trends in Capital Flows to Emerging Markets | |||
| Data | 2.3 | Transformation of Investment Options in Emerging Markets | |||
| Data | 2.4 | Emerging Markets: Shares in Economic Activities and Financial Markets | |||
| Data | 2.5 | Allocation to Emerging Market Assets | |||
| 2.6 | Integration of Emerging Market Assets into Global Markets | ||||
| 2.7 | Herding among Equity and Bond Funds Investing in Emerging Markets | ||||
| 2.8 | Mutual Fund and Institutional Investor Flows | ||||
| 2.9 | Cumulative Monthly Portfolio Flows to Emerging Markets from Different Types of Investors during Distress Episodes | ||||
| 2.10 | Flow Sensitivity to Global Financial Conditions by Fund Characteristics | ||||
| 2.11 | Drivers of Global and Dedicated Funds’ Flows into Emerging Markets around the Global Financial Crisis | ||||
| 2.12 | The Effects of Financial Deepening on the Sensitivities of Asset Returns to Global Risk Factor | ||||
| Data | 2.13 | Sensitivity of Local Yields to Portfolio Flows and Decline in Global Market Making | |||
Chapter 3 looks at the issue of too-important-to-fail and provides new estimates of the implicit funding subsidy received by systemically important banks. The subsidy comes from the expectation that the government will support large banks if they get into distress. Although financial reforms have helped reduce this subsidy, it remains sizeable. Policymakers should aim to remove this advantage to protect taxpayers, ensure a level playing field, and promote financial stability.
| Boxes | |||||
| Data | 3.1 | Cross-Border Banking Linkages | |||
| 3.2 | Benefits and Risks of Large Banks | ||||
| 3.3 | Estimating Implicit Too-Important-to-Fail Subsidies | ||||
| 3.4 | Banks and Sovereign Linkages |
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| 3.5 | Recent Policy Initiatives Addressing the Too-Important-to-Fail Issue | ||||
| 3.6 | Higher Loss Absorbency for Systemically Important Banks in Australia | ||||
| 3.2 | The Ratings-Based Approach | ||||
| Tables | |||||
| 3.1 | Summary of the Estimates of Implicit Subsidies | ||||
| 3.2 | Event Study | ||||
| 3.3 | Summary of Policy Measures | ||||
| 3.4 | Sample of Systemically Important Banks (as of 2012) | ||||
| 3.5 | Benchmark Credit-Rating Estimation Results to Explain the Overall Ratings | ||||
| 3.6 | Unit Rating Uplift: Robustness for Different Samples | ||||
| Figures | |||||
| 3.1 | Effects of Too-Important-to-Fail Protection on a Simplified Bank Balance Sheet | ||||
| Data | 3.2 | Changes in the Number of Banks and the Size of the Banking Sector | |||
| 3.3 | Total Assets of Large Banks | ||||
| 3.4 | Concentration in the Banking Sector | ||||
| 3.5 | Bond Spread Differential between Systemically Important Banks and Other Banks | ||||
| 3.6 | U.S. Banks’ Average Bond Duration | ||||
| 3.7 | Bond Spread Differential for U.S. Banks with Similar Leverage | ||||
| 3.8 | Mean Implicit Subsidy for Systemically Important Banks Estimated with the Contingent Claims Analysis Approach | ||||
| 3.9 | Implicit Subsidy by Type of Bank in the United States | ||||
| 3.10 | Average Subsidies Derived from Credit Ratings | ||||
| 3.11 | Subsidies Derived from Credit Ratings for a Bank Just Below Investment Grade | ||||
| 3.12 | Implicit Subsidy Values for Global Systemically Important Banks | ||||
| 3.13 | Event Tree of Government Policies to Deal with Systemically Important Banks | ||||
| Figures | |||
| Data | 1. | Major Net Exporters and Importers of Capital, 2013 | |
| 2. | Sovereign Credit Default Swap Spreads | ||
| 3. | Selected Credit Default Swap Spreads | ||
| 4. | Selected Spreads | ||
| 5. | Implied Volatility Indices | ||
| 6. | U.S. Corporate Bond Market | ||
| 7. | Euro Area Corporate Bond Market | ||
| Data | 8. | U.S. Commercial Paper Market | |
| Tables | |||
| Data | 1. | Capital Market Size: Selected Indicators, 2012 | |
| Data | 2. | MSCI Equity Market Indices | |
| Data | 3. | Emerging Markets Bond Index: EMBI Global Sovereign Yield Spreads | |
| Data | 4. | Emerging Market Private External Financing: Total Bonds, Equities, and Loans | |
| Data | 5. | Emerging Market Private External Financing: Bonds | |
| Data | 6. | Emerging Market Private External Financing: Equity | |
| Data | 7. | Emerging Market Private External Financing: Loans | |
| Data | 8. | Equity Valuation Measures: Dividend-Yield Ratios | |
| Data | 9. | Equity Valuation Measures: Price/Earnings Ratios | |
| Data | 10. | Emerging Markets: Mutual Funds | |
| (*)Please note that effective with the April 2011 issue, the IMF’s Statistics Department has assumed responsibility for compiling the Financial Soundness Indicators tables and they are no longer part of this appendix. However, these tables will continue to be linked to the GFSR Statistical Appendix on the IMF’s public website. | |||
| The following symbols have been used throughout this appendix: . . . to indicate that data are not available; —— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist; - between years and months (for example, 2008–09 or January–June) to indicate the years or months covered, including the beginning and ending years or months; / between years (for example, 2008/09) to indicate a fiscal or financial year. “Billion” means a thousand million; “trillion” means a thousand billion. “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point). “n.a.” means not applicable. Minor discrepancies between constituent figures and totals are due to rounding. |
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